Irc 1341

[kkuch]

I have a client who got approved for a 80% VA disability in Jan 2019. All non-taxable. The only stipulation to qualify was that he had to pay back his "severance/bonus" when he left the military back in 1992. The way they made him pay it back was monthly out of his non-taxable VA benefits for all of 2019 (Jan-Nov) before it was paid up. That payout was $32,914 (all paid back in 2019) and it cost him $5,252 in federal taxes back in 1992. He actually has the 1992 tax return and we were able to calculate the exact figures. I don't see anywhere about a statue of limitations from IRC 1341. Based on my research my guess is he qualifies and can take that $5,252 credit on his 2019 tax return. Is there anything I'm missing here? Thanks in advance for some guidance.

[TAXNJ]

Here is some info:

https://www.thetaxadviser.com/issues...-doctrine.html

https://taxmap.irs.gov/taxmap2018/pub17/p17-068.htm

[New York Enrolled Agent]

I have a client who got approved for a 80% VA disability in Jan 2019. All non-taxable. The only stipulation to qualify was that he had to pay back his "severance/bonus" when he left the military back in 1992. The way they made him pay it back was monthly out of his non-taxable VA benefits for all of 2019 (Jan-Nov) before it was paid up. That payout was $32,914 (all paid back in 2019) and it cost him $5,252 in federal taxes back in 1992. He actually has the 1992 tax return and we were able to calculate the exact figures. I don't see anywhere about a statue of limitations from IRC 1341. Based on my research my guess is he qualifies and can take that $5,252 credit on his 2019 tax return. Is there anything I'm missing here? Thanks in advance for some guidance.

I’m not sure the calculation is as simple as you suggest. Go to page 34 of Pub 525 for the calculation process and see what you come up with.

[kkuch]

Thank you very much for the replies. I've read everything you guys sent and I still believe the Taxpayer is entitled to the $5,252 credit. Has anyone had experience with this on audit? What documentation should taxpayer have ready upon audit?

[TAXNJ]

Thank you very much for the replies. I've read everything you guys sent and I still believe the Taxpayer is entitled to the $5,252 credit. Has anyone had experience with this on audit? What documentation should taxpayer have ready upon audit?

Think the normal client supporting documents and reference to the specific IRS code used to arrive at and support your position. All supporting data excluding The TaxBook reply posts (which is not applicable support).

[New York Enrolled Agent]

Thank you very much for the replies. I've read everything you guys sent and I still believe the Taxpayer is entitled to the $5,252 credit. Has anyone had experience with this on audit? What documentation should taxpayer have ready upon audit?

I still

believe

the Taxpayer is entitled to the $5,252 credit.

Belief has nothing to do with it. Did you do the calculation described in Pub 525 to determine the correct amount of the credit?

If yes and the result gives you $5,252 for the credit, then you know the taxpayer is entitled to the credit.

If no then your belief means nothing.

Sorry but I'm getting the feeling your belief is not based on the calculation in §1341(a)(5). Perhaps my feeling is wrong - please confirm the calculation led you to the result that you believe in.

[DoubleO]

When I have had this had this situation, I showed the calculations per Pub 525 as NYEA references on an Excel sheet. I save the sheet as a pdf and attach it to the return to be e-filed. For times I didn’t attach or include the calculations worksheet, we inevitably got a letter from IRS and had to send it in the reply. Including the sheet cuts down on IRS correspondence.

[kkuch]

I still

believe

the Taxpayer is entitled to the $5,252 credit.

Belief has nothing to do with it. Did you do the calculation described in Pub 525 to determine the correct amount of the credit?

If yes and the result gives you $5,252 for the credit, then you know the taxpayer is entitled to the credit.

If no then your belief means nothing.

Sorry but I'm getting the feeling your belief is not based on the calculation in §1341(a)(5). Perhaps my feeling is wrong - please confirm the calculation led you to the result that you believe in.

Your skepticism of my "belief" makes me have a lot less belief in what I'm believing. Haha. Seriously thank you everyone for the info and guidance though. So here's what I'm coming up with on the calculation. I tried to copy it using the same example used on page 35 of Pub 525 where method 1 using the deduction and method 2 is using the calculation of the credit.

Method 1 calculation (2019 figures)
W/O Deduction W/ Deduction
taxable inc. $45,471 $12,557
tax $5,069 $1,258


Method 2 calculation (1992 figures)
W/ Income W/O Income
taxable inc. $38,227 $5,313
tax $6,049 $797


So tax under Method 1 is $1,258. Tax under Method 2 is ($183) ($5,069-$5,252). Based on pub 525 you can use whatever results in less tax. That would be Method 2 using the credit of $5,252

[New York Enrolled Agent]

Your skepticism of my "belief" makes me have a lot less belief in what I'm believing. Haha. Seriously thank you everyone for the info and guidance though. So here's what I'm coming up with on the calculation. I tried to copy it using the same example used on page 35 of Pub 525 where method 1 using the deduction and method 2 is using the calculation of the credit.

Method 1 calculation (2019 figures)
W/O Deduction W/ Deduction
taxable inc. $45,471 $12,557
tax $5,069 $1,258

I think the deduction refers to a Schedule A deduction (not subject to the 2% reduction) and still permissible under TCJA. Was there a Schedule A involved? It appears you're using the $32,914 as an adjustment to taxable income. That may or may not be accurate if the Schedule A was involved. I could be wrong but that's my belief.

[kkuch]

I think the deduction refers to a Schedule A deduction (not subject to the 2% reduction) and still permissible under TCJA. Was there a Schedule A involved? It appears you're using the $32,914 as an adjustment to taxable income. That may or may not be accurate if the Schedule A was involved. I could be wrong but that's my belief.

Haha. Yes, they barely made the Schedule A with $10k SALT cap, $14k mortgage int, & $800 donations. So the $32,914 would come directly off taxable income in that calculation. Either way the deduction would result in more tax than using the credit. Therefore the credit would be used in either scenario correct?